Sunday, April 26, 2009

Japanese pension fund sells government bonds

The capital well is running dry and some economies will wither

Japanese pension fund becomes a seller of Japanese government bonds. I think this places pressure on the UK issuance in the future as the J. bond yield must go up to counter falling demand. The article points out that the UK is in a global market as a weak financial player, and international competition amongst governments to find buyers for gov. debt. Or yields will go up, and borrowing costs will rise. Perhaps the UK budget was really the point of no return as we are locked into excessive debt issuance with rising servicing costs. New Labours plan to compensate for a fall in the velocity of money by attempting to increase the quantity precludes any recovery. Hold onto your hats if you love low house prices (and unemployment boo..).

Posted by stillthinking @ 12:02 PM (1594 views)
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8 thoughts on “Japanese pension fund sells government bonds

  • mountain goat says:

    Wile E Coyote didnt see he’d run off the edge of a cliff and tried running on (money printed from) air

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  • Traders already whisper that some governments are buying their own debt through proxies at bond auctions to keep up illusions – not to be confused with transparent buying by central banks under quantitative easing. This cannot continue for long.

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  • A stunning and brilliant article from Ambrose Evans-Pritchard.

    Traders already whisper that some governments are buying their own debt through proxies at bond auctions to keep up illusions – not to be confused with transparent buying by central banks under quantitative easing.
    That’s scary stuff. It can’t end well – something has got to give. Ultimately we’re all heading down the Icelandic path and there’s not much we can do about it. Time to kiss our pension funds goodbye and prepare to work til we drop.

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  • stillthinking says:

    Are you so sure about default? I think the Japanese path is more likely. Seems to me that what really reinforces deflationary spirals is paradoxically fear of future inflation. Neither King nor the government have credibly committed to a 2% inflation target in the future, and we can see that pretty much everybody is concerned that future inflation is going to be high.
    The more the government borrows and prints to put into circulation, the more that impression is reinforced, and the less likely that consumer debt is going to pick up as nobody wants to be in debt when inflation has to be brought under control with high rates.
    I wonder, for example, how existing home “owners” will manage with high rates, and I don’t think they will be able to service their debt, so I hold off taking out a mortgage, and my behaviour, from anticipation of inflation, is actually deflationary.

    It is the fear of future inflation that causes debt deflation.

    What is worse, as time goes on, and the government borrowing continues, the inflationary fears actually worsen, and as they do, the deflationary spiral tightens, the money supply continues to collapse, and as the money supply goes down, any recovery in borrowing is more inflationary than it would have been otherwise, being an increase on a smaller base.
    After all, the costs of borrowing are not absolutely tied to the inflation rate. Our government is going to end up with higher servicing costs because of competition for funds in a deflationary environment, -not- because of inflation itself. Further, savers in the UK are not going to -lose- their savings, their savings are being spent to maintain the state sector. That is different from Iceland, they genuinely lost the money to overseas. From UK savers point of view the same, but not really.

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  • stillthinking,

    I don’t think the Japanese path is available to us any more. Japan’s government has been heavily in debt for the past two decades and now they’re competing for funds with the rest of the world. There’s too much debt and not enough people willing to lend to risky borrowers.

    So how is the [Japanese] Ministry of Finance going to fund a sovereign debt expected to reach 200pc of GDP by 2010 – also the world’s biggest – even assuming that Japan’s industry recovers from its 38pc crash?

    There are only four ways out:
    1) Quantative easing. Print money to pay off the debts.
    2) Default. One-by-one, major countries default on their debts.
    3) Tax rises. Tax everything possible and pray the economy doesn’t choke.
    4) Asset raids. Government grabs 10% of cash in all bank accounts; 10% of all land; 10% of all shares.

    Option 1 is probably the least painful all round.
    Option 2 is a distinct possibility but less likely than option 1.
    Option 3 is already happening.
    Option 4 is unlikely but just about possible.

    Looks like Robert Mugabe was right all along….

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  • Drewster,

    I have a growing suspicion that Ambrose is lurking on this site, although I don’t think he is fully signing up to the problems we have identified.

    Japanese parallels are a misleading distraction – since WWII, Japan has pursued a western friendly, but otheriwse very different path. Their problems had causal factors that were unique to them; the rest of the developed world is not queuing up to follow.

    The way out, put simply, is inflation. As i have said before, inflation is now the economic necessity that no-one in high office dares to discuss or admit to.

    But it will come – and in style…

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  • Interestingly, Drewster, I read the other day that back in the 1990s Donald trump suggested a one off 14.5% wealth tax on all US individuals and trusts worth more than $10m as this would wipe out the US’s external debt at a stroke. So if it debt was spiralling out of control (okay it already is, but I mean if the servicing of that debt had become disorderly), you could see the appeal of this kind of asset grab. The only thing is it would have to be a tax paid in kind like you say: actually liquidating assets to pay a 10% tax in cash would be a disaster for the market.

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  • UT @6

    With such a conviction that inflation is ‘built-in’ to the recovery plans……do you think there are areas of the property market that will hold more value than other assets?

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